We met with Top Glove recently and came away feeling positive on the group’s near term outlook going forward. Top Glove shared that they expect nitrile & powder free NR glove ASPs to decline from Feb/Mar levels by 3-5% in Apr/May. Despite this, powdered NR glove ASPs are expected to increase by 3-5% going forward as powdered gloves are mainly sold to emerging nations, which have not rolled out vaccines as quickly as developed nations. All in all, we expect 3QFY21 earnings to be stronger QoQ as 2QFY21 production volumes were impacted by EMCO. Our forecasts remain unchanged. We maintain our BUY call with unchanged TP of RM8.14.

We Met With Top Glove Recently With the Following Key Takeaways:

Shortcomings rectified. Top Glove has found to be in breach of Act 446 (which requires certain living requirements for employees) by the labour department. While Act 446 came into force in Sep-20, Top Glove were charged with breach of this act based inspections done in Nov-20, indicating they were not given adequate time to make necessary changes. However, Top Glove has since fulfilled all requirements and is currently waiting for the Certificate of worker Accommodation (CFA). Top Glove expects to be fined RM50k per charge (RM500k in total).

U.S. customs and border protection (CBP). Top Glove said they have recently been audited by the CBP and expects the Withhold Release Order to be revoked soon. Top Glove expects this to result in increased sales to the US (which sales volume have only grown +6% in 1HFY21 YoY as compared to Western Europe (1HFY21 +62% YoY) during the pandemic era.

ASP and earnings outlook. Top Glove shared that they expect Nitrile & powder free NR glove ASPs to decline from Feb/Mar levels by 3-5% in Apr/May. While nitrile glove lead time has shortened to 170 days (from over 500 days at the peak), demand remains strong for the time being (pre-pandemic: 30-40 days). Despite this, powdered NR glove ASPs are expected to increase by 3-5% going forward as powdered NR gloves are mainly sold to emerging nations, which have not rolled out vaccines as quickly as developed nations. All in all, we expect 3QFY21 earnings to be stronger QoQ as 2QFY21 production volumes were affected by EMCO. In the absence of EMCO impact on productions, Top Glove estimate 2QFY21 core PATAMI would have been ~RM500m higher than the RM2.9bn reported.

No impact from higher freight rates. Top Glove shared they will not incur additional charges from higher freight rates as they sell goods on a FOB basis, in which the buyers bears the cost of shipping.

Forecast. As the meeting yielded no surprises, our forecasts remain unchanged.

Maintain BUY, TP: RM8.14. We maintain our BUY with unchanged TP of RM8.14. We value Top Glove using with their pre-pandemic 5-year average PE multiple (CY15-19) tagged to sustainable earnings in a post-supernormal earnings environment (FY23) summed with free cash flows generated during the boom period (both discounted back to PV) (Figure #1)

Source: Hong Leong Investment Bank Research - 29 Mar 2021